Management Company Liability – How to Avoid the Pitfalls of Liability

Over the past approximately ten (10) years, there has been increasing sophistication and professionalism displayed by most management companies which perform managerial services for common interest developments.

The increasing sophistication and professionalism of management companies has grown out of several competing reasons including, (1) the understanding that managers are viewed by the homeowners Association as professionals and thus must conduct themselves accordingly; (2) the size of management companies has steadily increased which has caused the smaller operations working out of a garage to recede; (3) the increasing litigious nature of our society to prosecute entities for failure to conduct oneself in a professional manner provides a ripe opportunity for lawsuits and legal exposure, thus, necessitating greater sophistication and professionalism.

The basic premise under California law with respect to the duty of a professional, which a management company would be held to the standard of, is identified in the California Book of Approved Jury Instructions (BAJI) §6.37 as follows:
“In performing professional services for a client, a [management company] has the duty to have that degree of learning and skill ordinarily possessed by reputable [management companies], practicing in the same or similar locality under similar circumstances. It is a further duty to use the care and skill ordinarily used in like cases by reputable members of the same profession practicing in the same or a similar locality under similar circumstances, and to use reasonable diligence and best judgment in the exercise of professional skill and in the application of learning, in an effort to accomplish the purpose for which the professional was employed. A failure to perform any such duty is negligence.”

Further, BAJI 6.37.2 sets forth the fact that professional perfection is not required and states as follows:
“A [manager] is not necessarily negligent because he errs in judgment or because his efforts prove unsuccessful. However, a [manager] is negligent if the error in judgment or lack of success is due to a failure to perform any of the duties as defined in these instructions.”

By utilizing the legal criteria set forth in BAJI and applying it to a management company, it is clear that a manager is held to the same level of expertise as other managers in the industry and within a similar locality in which the manager practices. Obviously, in acting as a professional manager, perfection is not the standard of care; however, if an issue arises as to the advice or performance provided by the management company, that management company will have the burden to demonstrate that they attempted to disseminate their opinion, advice and guidance in a good and proper business like manner based upon an evaluation of the issues that were involved at the time or knowledge of such items and the advice provided.

All too often, management companies are placed in the unenviable position of being requested by the homeowners association to provide advice in areas that they are clearly not qualified. As an example, management companies are often asked to provide legal advice in interpreting a confusing section of an association’s Covenants, Conditions and Restrictions (CC & Rs). All too often, that advice is freely provided. In reality, what a management company should do to avoid potential liability is to advise the Board of Directors of the homeowners association to seek the advice and opinion of legal counsel on the interpretation issue. By doing so, management companies have in fact provided proper advice, i.e. seek out a professional in the area in which the issue arises, and, also, has provided protection for the management company itself in not providing opinions as to issues in which they are not qualified.

Another area of growing concern pertains to the manager acting as a construction manager in renovation projects. As a result of the multiple natural disasters that have struck the Nation over the last several years, including the Florida hurricanes, floods in the midwest, and the Northridge earthquake in California, management companies have been requested to act as construction managers or construction overseer for repairs to projects. Generally, management companies are not paid by the association to act as construction managers, nor do most management companies have the requisite knowledge to perform such services effectively.

Additionally, management companies are faced with the unenviable position of not only being requested to perform services which may be beyond their area of expertise, but are also generally not compensated for such additional services. It is quite common in construction projects for problems to arise, thus a management company actively involved in the construction could be sued for providing poor advice, improper overseeing, etc.

Management companies can best protect themselves by (1) providing sage advice in those areas in which they are competent to perform, i.e, preparing and providing homeowner association minutes and monthly accounting (excluding auditing); (2) providing advise to the association as to the need and use of outside vendors and professionals, as well as recommendations; (3) helping coordinate vendors in obtaining bids for repairs and consultants without actually providing oversight and supervision over the conduct of these outside vendors. By providing the services that a management company has actually contracted to perform and for which they are being paid, management companies may not always avoid liability, but they will go a long way in minimizing lawsuits against them.